What is a Blockchain?

A blockchain is distributed ledger of transactions that cannot be (easily) altered and is verifiable by all participants. Every recorded transaction is shared and verifiable so all participants can agree on the authenticity of each transaction.

“First and foremost, Blockchain is a public electronic ledger that can be openly shared among disparate users and that creates an unchangeable record of their transactions, each one time-stamped and linked to the previous one. Each digital record or transaction in the thread is called a block (hence the name), and it allows either an open or controlled set of users to participate in the electronic ledger. Each block is linked to a specific participant.” (Mearian)

Distributed. All participants see every transaction in the ledger, so all agree on the validity of each separate transaction or block.

Verifiable. Each transaction is a block. Each participant has a history of transactions, or chain of blocks, connected through a set of cryptographic keys, that tie the chain together. Once created, no individual block may be altered without breaking the chain in a way that is automatically detected by the other participants.

Participants. A participant is a member sharing the ledger and possibly participating in transactions. The transactions can be monetary, such as a cryptocurrency, or any other form of transaction. Networks of devices such as the Internet of Things (IOT), a smart energy grid, or a complicated supply chain are only a few of the potential uses of a blockchain.

A Simplified Example

Imagine a room full of traders using a shared currency (eCoins) that they mutually maintain. They decided to eliminate the need for a bank and to manage their own currency. Each has some currency on hand, some have goods to sell, others are wanting to buy. To manage the currency, they must have a way to verify every participant’s balance. To do that, every exchange of currency is shared with each participant.

Bob buys something from Sue for 35 eCoins, everybody gets the notice that Bob just paid Sue 35 eCoins. Sam exchanges US dollars for eCoins with Sue at the rate of 0.75 eCoins per Dollar. Sam pays Sue $200 and receives 150 eCoins; everybody gets the notice that Sue just paid 150 eCoins to Sam. Nobody has to know why the payments, but they do know the amounts and participants in each transaction. This guarantees each transaction; if the payer does not have the eCoins required, the transaction will not occur.

In addition, a small group of these participants do extra work. They double-check the validity of each exchange. After the Sue pays Sam 150 eCoins, they double check the transactions in Sue’s transaction blockchain to ensure that she actually has the 150 eCoins she claims to have. These verifiers receive a small amount of eCoins in exchange for their extra efforts.

Replace that room with the internet, the ledgers with blockchain software, and this is a very simplified description of how cryptocurrency works.

Obviously, this group’s efforts to replace a central bank and manage the currency themselves means that they expend a lot of effort maintaining the ledgers, duplicating and sharing the transactions, and verifying to double check that everybody is honest. This is only possible through the use of highly efficient computers to handle the transaction sharing, calculations, and verification.

Not all blockchains are used for cryptocurrency. Replace “cryptocurrency” with “electricity” and “people” with “meters” and you have a chain of reporting devices on a smart energy grid. Or, use “shipping containers” and “carriers” and the chain supports a complicated supply chain.

Practical Uses

A Forbes magazine article titled, What Is Blockchain And What Can Businesses Benefit From It? suggested the answer, “… [businesses] which possess the following traits: Transaction-based; Benefits from public scrutiny; Benefits from history [ledger] that can’t be rewritten; [and] Decentralization benefits the end user or customer.” (Iinuma)

Any business process that depends on a shared, highly reliable, transaction ledger can potentially gain from blockchain technology. Cryptocurrency was the obvious first use, but the advantages of a shared ledger of transactions is not limited to financial information. Many networks of devices monitoring or controlling decentralized transactions can benefit from blockchain technology.

Consider a smart power grid with some participants using power, some generating power using wind or solar, and others doing both. The MIT Technology Review describes this collection of electricity users and providers as “a byzantine system [that] racks up transaction costs, while leaving plenty of room for accounting errors…”. They go on to suggest, “What if the meter wrote data directly to a blockchain instead? Most of these problems would vanish at a stroke…” (Orcutt).

Another example is a complicated supply chain. IBM and Maersk are launching TradeLens, a pilot blockchain project to support supply chains. Reuters reported, “Shipping group Maersk (MAERSKb.CO) said on Thursday [August 9, 2018] 94 companies and organizations have so far joined a blockchain platform developed with IBM (IBM.N) aimed at boosting efficiency and limiting the enormous paper trail of global container shipping.” (Reuters). Their goal is to help manage the supply chain from end to end, increasing efficiency and reducing paperwork and bureaucracy.

Like many innovative technologies, the creative ideas about how to use this new technology are yet to be discovered. Some will be truly disruptive and market changing, others will simply improve an ongoing system in ways that the end users may not be fully aware of at all.

Smart Contracts

Blockchains are also used to create Smart Contracts. Details of Smart Contracts are beyond this brief overview, but in short, they are a computer based contract that can execute automatically depending on pre-set conditions. For example, a Smart Contract between several parties could execute one or more financial instruments or issue an order to ship a commodity based on market conditions or the actions of the signatory group.

It is important to know that smart contracts have a history of problems, partly because they are new there is little experience with them.

In The Truth about Smart Contracts, Jimmy Song summed up the second point, “Consider that writing normal contracts takes years of study and a very hard bar exam to be able to write competently. Smart contracts require at least that level of competence and yet currently, many are written by newbies that don’t understand how secure it needs to be. This is very clear from the various contracts that have shown to be flawed.” (Song)

In a Forbes overview of the value and shortcomings of smart contracts, Sherman Lee described part of the problem, “Looking at the numbers, one might take Ethereum’s 3% smart contract failure rate as a tolerable loss, a proverbial drop in the ocean. Yet, when a safeguard fails to protect billions of dollars worth of currency, bad things can happen.” (Lee) Lee goes on to describe the upside and suggest ways to secure smart contracts.

Fully understand the value and shortcomings of smart contracts before entering into one.

Is Blockchain Technology Right for Your Business?

The answer, of course, depends on the industry and your specific business. The IT group must consider the business strategy, evaluate risks, costs, value, and return on investment. For instance, while it may be possible to add monitoring equipment that uses a blockchain to record progress through the stages of a manufacturing process, a simpler solution may provide the same information for much less cost. On the other hand, using an automated blockchain to track that process from end-to-end may be the best, or only, means available to provide the information required to keep a complicated process running at peak efficiency.

Marketing may be the motivation. Some businesses may soon need to establish blockchain expertise to be considered competitive. Even if the business analysis proves that the return is low, the marketing reality may be that without some demonstrable blockchain expertise, the business will be the equivalent of a buggy-whip provider at the start of the automotive era.

Like any other strategic business decision, knowing the costs, expected return, and value (both tangible and intangible) is the basis for deciding whether this new technology is what you need right now, or something to “keep an eye on” for the future.